Economist urges

In attempting to provide a safety net for farmers against steep price declines such as those over the past three years, government policymakers should be careful not to overshoot their goals, says David Orden, Professor of Agriculture and Applied Economics at Virginia Tech.

“The long, slow policy evolution for most crops away from supply control market interventions should not be reversed,” he said at USDA's annual Agricultural Outlook Conference in Washington. “Post-FAIR farm policy is vulnerable to overshooting: Too much support is likely to be offered and policies that are adopted will produce more output than markets otherwise need.

“With inelastic demand in the short run, this creates a policy-induced reduction of market-derived farm revenue, offsetting some of the safety net payments and leading to additional calls for income support.”

New mechanisms need to be investigated, Orden says, that would “put some bounds on eligibility” for farm safety net programs. And, “there is also need for reform of remaining interventions that rely on supply controls to raise market prices, such as for sugar — a program that proved costly in 2000 and runs counter to U.S. interests in an open global trading system.”

The issue of whether there should be a farm income safety net has both supporters and opponents, he notes.

For most agriculturalists, he says, the answer is “an obvious and unambiguous affirmative,” while others call for “substantial restraint.” The lack of enthusiasm is not about a safety net per se, “but about what should be the federal government's involvement. There are many opportunities to spread risks and carry income across years…and government-provided mechanisms are only some of the options.”

Calls for expansion of support programs should be tempered, Orden says, by (1) avoiding the tendency to go too far with cash payments and (2) any reversion to a safety net accomplished through acreage of marketing controls used in conjunction with price supports.

“American agriculture scarcely resembles the troubled sector of 70 years ago, when the average income among six million farmers was less than half the national average. Agricultural productivity has improved through technological advances, capital investments, and farm consolidation. The modernization of agriculture has allowed the real price of food to fall without impoverishing efficient farmers, and the farm/non-farm income gap has mostly been eliminated.

“This is evidence of markets working,” he declares, “although interventions undertaken to prop up prices have sometimes idled farm resources and distorted incentives.”

There has been a shift in direction for farm policy, Orden notes, away from acreage supply controls combined with price supports above market-clearing levels to less supply intervention and more direct income support — at least for crops that are exported.

But, Orden says, the FAIR act “did not put farm policy on a new strategic path” of reform. “While crucial changes in farm program instruments were made, the reform path was one of a heavily compensated ‘cash-out’ of farm programs.”

While the 1996 legislation initially made more federal dollars available to farmers than without a farm bill and increased, rather than decreased the number of farmers receiving government checks, the fiscally-disciplined transition to lower payments that was written into the bill got sidetracked, he says by (1) nominal loan rates above market prices that resulted in marketing loan payments of billions of dollars in 1998, 1999, and 2000; (2) a lot of direct income support through higher AMTA payments; and (3) higher subsides for crop and revenue insurance, ad hoc disaster payments, and expansion of commodity coverage.

“The bidding war over farm policy that has escalated in a closely-contested Congress and with the emergence of fiscal surpluses has resulted in policy overshooting — the provision of too much support,” Orden says.

Approaching limits

“Payments have increased so much, particularly marketing loan payments, that the U.S. has approached the limit on production-inducing expenditures set under commitments made in the World Trade Organization. That limit has begun to enter the farm policy debate…and there is now a risk that the U.S. commitment to a WTO ceiling on distortionary payments may be turned into a floor by such expenditures.”

Some of the good intentions of the FAIR act may instead be hurting, Orden says, by increasing production and slowing adjustments that would bring about more profitable, market-derived equilibrium conditions.

While a “safety net” protects farmers from the full effects of adverse downtrends in prices and income, it also keeps production above needed levels, pushing the market price downward, he says. “Part of the safety net payments that farmers receive from the government simply offset lost market-derived farm income.”

Further, he says, by knowing that they are protected from the “lower tail of possible price, yield, or income distributions,” farmers then shift their production, adding to supply and putting additional pressure on market prices.

“Inelastic demand means less gross farm revenue. Farmers receive less market revenue than otherwise because of the safety net every year, but they only receive safety net payment benefits in years when prices are low.”

Quickly reduces income

It doesn't take too much production enhancement to reduce the market-derived income of farmers, Orden notes. “This is a vicious, not a virtuous cycle. The lower income then generates calls for more help in the form of income transfers.”

Current safety net proposals involving counter-cyclical payments triggered by downturns in market-derived income are based on the theory that such payments would insulate farmers from a wide variety of adverse shocks and lessen the pressure for Congress to act on an ad hoc basis, he says.

These payments “might avoid some of the hazards associated with insurance policies based on individual farm yields, but the effects of these various proposals have not been fully sorted out. But one study, he says, indicates that the production-inducing effect would be “equivalent to that of traditional loan rates.”

Farm bills have also been slow, Orden says, to enact reforms for commodities “that receive border protection” through a rigid type of farm income safety net — a relatively high price guarantee enforced with supply controls. An example, he says, is sugar, which in 2000 saw the government take possession of nearly one million tons of sugar to prop up prices. “More such waste is in the offing if the sugar program is not changed.”

The current challenge for much of farm policy, Orden says, is “how to make further moves toward market orientation attractive, while avoiding the worst overshooting effects inherent in unconstrained provision of a safety net based on direct payments. These overshooting effects will not be avoided unless Congress writes some restraint into policy rules.”

Citing a “long-standing criticism” that farm payments go primarily to the largest producers, and point to frequent calls for limits on such payments, he says pressures for size-related policy targeting “have not been well-received, and notes that the recent report of the Commission on 21st Century Agriculture “rejects this approach outright.

“Today's farm policy is not anti-poverty policy as much as it is industrial policy,” Orden says. “Yet, there is a concept from federal welfare reform — that of setting limits in individual eligibility — that may prove constructive for farm policy design as well. Instead of targeting farm support with payment limitations, why not limit the number of years any one farmer, regardless of size of operation, can choose to draw on government supports such as AMTA or loan deficiency payments?

“The idea is that a farmer would have this federally-provided tool for income smoothing and could choose when to utilize it, but would not be able to anticipate being forever ‘on the dole.’ Perhaps the limit that a farmer could draw support in any five years of his or her choice over a lifetime of farming would be appropriate.”

If per-farmer eligibility limitations proved too difficult to apply, Orden says, “then a safety net option could be tied to base acres instead of persons,” and “over a generation or two, farm asset values would come to rest on market-based determinants.”

Several thousand representatives from the agricultural, research, and education community from the U.S. and internationally attended the Outlook Conference.